SIMONSON SAYS: Cheery or Dreary New Year? Some of Each

The week before Christmas brought glad tidings to construction. But some stockings were stuffed with lumps of coal. First, Reed Construction Data reported that the value of nonresidential starts in November soared 35 percent from October’s level and 13 percent above the November 2009 total. Even better, “the November starts surge is much stronger than the nominal 35 percent gain,” Reed explained, because the data are not seasonally adjusted and “November is a seasonally weak month for construction starts.” But the gains were unevenly distributed: more than $1 billion each for “hospitals, manufacturing (Nissan battery factory), military, bridges and miscellaneous civil projects. The only significant declines were for retail and highways.” Reed Chief Economist Jim Haughey predicted, “Starts trends are expected to change in 2011. The pipeline of funding appropriated for heavy and institutional projects before the recession or included in stimulus programs is being used up and the pace of new funding is ebbing. By contrast, lending approval for commercial projects will improve significantly. This has already begun for apartments.” In another positive omen for construction, the American Institute of Architects (AIA) reported on Friday that its Architecture Billings Index, a measure of the number of architecture firms that report higher or lower billings compared with the prior month, moved to its highest level in three years in November, 52.0. (A reading of 50 indicates the number of respondents with higher billings equals the number with lower billings.) Firms with residential, institutional, and commercial/industrial practices all had readings close to 50; firms with mixed practices reported a net decline in billings but moved closer to the 50 mark. Reflecting the mixed outlook, “Overall revenue growth is projected to average in the 2 to 3 percent range, but almost one in three firms expect revenue for 2011 to be below 2010 levels,” the AIA reported. “Over half of these firms expect the falloff to be 10 percent or more. Still, well over four in 10 firms expect to see growth this coming year, with the remaining quarter anticipating that 2011 will be comparable to 2010. Both residential and commercial/industrial firms are more optimistic about business conditions over the coming year. Half of the firms in each group are expecting revenue increases in 2011, while only one quarter are expecting declines. In contrast, almost half of institutional firms are expecting revenue declines over the coming year, with only 38 percent expecting growth.” Congress provided a mixed bag as well. The tax bill that President Obama signed on Friday will add short-term stimulus and certainty for individual and business taxpayers. But several provisions that would have been helpful to construction, such removing the private activity bond volume cap for water and wastewater projects, were omitted. Also, by passing only short-term, level funding extensions for highway spending and overall government operations, Congress has denied agencies or contractors the certainty needed to plan long-term investments. Thus, it appears 2011 will begin a continued high level of federally funded construction on stimulus, base realignment and Gulf Coast hurricane prevention projects but continued weakness in most private categories of construction. As the year wears on, private construction should climb out of the basement but public work will taper off, meaning overall nonresidential construction spending will be only slightly higher than in 2010. For more information, contact Ken Simonson at simonsonk@agc.org.